Currency market liquidity on the rebound, data providers say

Saudi riyal, yuan, Turkish lira, pound, U.S. dollar, euro and Jordanian dinar banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

LONDON (Reuters) - Investors are gradually returning to the currency markets following a rout in March when the spread of the new coronavirus sent most units tumbling against the dollar, a group of market data providers found.

Liquidity in the foreign exchange markets is coming back toward pre-COVID-19 levels for some of the major currencies, with most recording on average about 70% to 80% of their previous daily volumes, Mosaic Smart Data, CLS and MUFG found in a collaborative project.

Trading volumes in emerging market currencies “are not faring as well”, however, and remain at about 45% of pre-crisis levels, while outside of market hours trading generally remains very thin, the group found.

Euro/dollar - the most traded currency pair in the $6.6 trillion a day market - has seen market liquidity return to nearly 80% of its pre-crisis level.

Liquidity in dollar/Japanese yen was largely shielded from disruption throughout the crisis. Both units have remained appealing as safe-haven currencies during the pandemic, with money managers shifting assets from riskier markets to more stable ones.

Liquidity in euro/Swiss franc - another widely traded pair during market stress - was at 85% of pre-crisis levels, making it the most used currency pair among the G10 right now.

Within the sterling/dollar pair, analysts noticed “an immediate and sharp spike” in liquidity after the London fixing hours, marking a change in traders’ behaviour relative to pre-COVID-19 market conditions, they said.

The yen, Australian and Hong Kong dollars, Swiss franc and South African rand have seen the biggest increases in liquidity. But traders are still avoiding the euro, sterling, Canadian dollar, New Zealand dollar and Mexican peso.

But “liquidity falls off sharply outside of trading hours and it is still almost as poor as at the peak of the health crisis,” the group said.